In today’s Finshots, we look at what could be India’s buzzword for 2023 — services exports.

The Story

Exports can primarily be clubbed into two categories.

We can export goods or merchandise which includes things like textiles, jewellery, and processed petroleum products. And then we can also export our services such as software or information technology too.

These exports are the lifeblood of any country. Every time we export stuff, we get paid in foreign currencies (mostly dollars). More dollars help us beef up our currency reserves and help us to pay for all the imports as well. Having a nice chunk of dollars in the reserves even helps stabilize economies during tumultuous times.

So yeah, exports can make or break a country.

And there’s something brewing in our export data.

See, our export of goods has been lacklustre this year. It has grown by just 7.5% from April to February of this financial year. Compared to the same period in the previous year, of course. Now that may not be because we’re producing less or because we’ve had bad relationships with our trade partners. But rather, the global economy is in the doldrums today and everyone’s consuming less and less.

But just because global demand is weak doesn’t mean we’re cutting back on our consumption. And if we keep importing things, it can affect our balance of trade. Our reserves will deplete too. So we need something to balance it out.

Enter, services exports.

From April to February of this financial year, this segment has grown by a whopping 30%. It’s bringing in the dollars. And for the first time ever, we might have breached the $300 billion export figure this financial year. So naturally, people are paying attention.

Now when you hear services, IT is probably the first thing that comes to your mind, right? And you’d be right. IT services contribute to 45% of services exports.

But that’s not all there is to our services segment. There’s another category that has been quietly mushrooming in the background. It’s called business services and it now makes up 25% of services exports. If you’re wondering what that is — think stuff like accounting, audit, R&D, quality assurance, and even management consulting.

In fact, this segment is now growing at almost double the pace of our traditional software services.

India’s services exports is getting a makeover.

So, why is this happening?

Well, it’s a little tough to say. Because as the Services Export Promotion Council points out, we don’t really have granular data on these exports. In fact, we don’t even know to who we’re really exporting these services to.

But we can hazard a guess as to what’s going on. And the most obvious answer that everyone seems to agree on is that we have a labour cost arbitrage for business services. We have cheaper workers who’re also extremely skilled in their domains. For instance, CNBCTV18 says that while a qualified accountant in the US costs upwards of ₹70 lakhs a year, a similarly skilled one in India costs just ₹15 lakhs.

That means, unlike the BPO boom of the 1990s, you know the call centres and stuff, this may not fizzle out quite easily. Back then, companies just needed a large English-speaking population at a low cost. India served the need first. And then others like the Philippines jumped in. The skills needed for these roles weren’t that hard to source.

But that’s not the same with R&D services or management consulting and accounting. And that might continue to give India a leg up.

Because just look at what’s happening with the Global Capability Centres (GCC) in India. Think of this as business units set up by global conglomerates to outsource the work of execution cheaply. You know, the back-office stuff. Now, over the past few years, GCCs have evolved in the country. They’re not just doing the grunt work. Instead, they’re increasingly being used to create strategy, help with systems design, and develop software from scratch. It’s value-addition at its finest. And there’s no better example of the changing tide than UK pharma giant AstraZeneca rebranding its GCC in Chennai to a Global Innovation and Technology Centre. To truly reflect the centre’s contribution to its business.

The end result is that India now has 1,500 GCCs peppered across the country. In fact, 45% of the world’s GCCs are now in India. And in 2022, 65 news centres were set up.

But here’s the thing. Despite the boom in our services, we’ve kind of pushed them to the background. Over the past few years, we’ve been putting our foot on the manufacturing accelerator instead. We want to be the next China. We’re really not giving services exports the attention it deserves. Think about it. There aren’t too many policies that directly incentivise services exports too. At least not like manufacturing which has the ‘Production Linked Incentive’ scheme.

And maybe that’s because we’ve seen the data. We’ve seen that while as an industry, services contribute 60% to our GDP, it only contributes to 28% of our employment. So we want to create more manufacturing jobs to tackle unemployment.

But some experts think that we’re maybe looking at it through the wrong lens.

Think of it this way — if the services industry creates high-paying skilled jobs, it can lead to the generation of multiple indirect jobs in the local economy. This happens because people move into the area of work and start to demand more goods and services. To cater to this demand, you’ll see a proliferation of hair salons, restaurants, drivers, and electricians in the area too. And remember, jobs in the services industry pay better than manufacturing. Think of the management consultants or the software engineers. These folks have high spending power. And that’s what leads to the creation of other kinds of jobs too.

For instance, when economists looked at Apple’s impact in Cupertino a decade ago, they found a massive multiplier effect. Although Apple employed only 13,000 people, it actually led to the creation of 70,000 indirect jobs in the area. It was a classic example of the employment multiplier effect.

And in India, some studies point to 8 indirect jobs being created for every new job in the high-skilled service industry.

So yeah, the growth of services exports is a massive win for India. And hopefully, the segment continue to grow in leaps and bounds. Because the trickle-down effect on jobs might well work in our favour too. Even if it’s not so obvious at first.

Until then…

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Ditto Insights: Why Millennials should buy a term plan

According to a survey, only 17% of Indian millennials (25–35 yrs) have bought term insurance. The actual numbers are likely even lower.

And the more worrying fact is that 55% hadn’t even heard of term insurance!

So why is this happening?

One common misconception is the dependent conundrum. Most millennials we spoke to want to buy a term policy because they want to cover their spouse and kids. And this makes perfect sense. After all, in your absence you want your term policy to pay out a large sum of money to cover your family’s needs for the future. But these very same people don’t think of their parents as dependents even though they support them extensively. I remember the moment it hit me. I routinely send money back home, but I had never considered my parents as my dependents. And when a colleague spoke about his experience, I immediately put two and two together. They were dependent on my income and my absence would most certainly affect them financially. So a term plan was a no-brainer for me.

There’s another reason why millennials should probably consider looking at a term plan — Debt. Most people we spoke to have home loans, education loans and other personal loans with a considerable interest burden. In their absence, this burden would shift to their dependents. It’s not something most people think of, but it happens all the time.

Finally, you actually get a pretty good bargain on term insurance prices when you’re younger. The idea is to pay a nominal sum every year (something that won’t burn your pocket) to protect your dependents in the event of your untimely demise. And this fee is lowest when you’re young.

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